Author Topic: Non-Equity Investment Options (With a Twist)  (Read 976 times)

Batastrophe

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Non-Equity Investment Options (With a Twist)
« on: March 11, 2016, 03:55:02 PM »
Hey all - In a bit of a conundrum and figured I'd reach out for some sage counsel.

Basic Info:

- Planning on FIRE in 4-5 years (at age 50)
- Looking to establish a 50/50 or 60/40 portfolio for retirement
- Currently 70/30 with the later in home equity (so all current liquidity in equity. Home will be sold at FIRE as we move to an already paid for retirement home/property)
- Stashing $100k per annum until FIRE
- Nearly all the above in taxable accounts

Issues
- Want to use final years of accumulation to achieve portfolio allocation
- Don't necessarily want to subject this to market volatility, but realize I'll get better gains if I do
- With interest rates being low (and expected to rise), most fixed income options don't yield much and may slip as rates rise
- I'm a high-earner (albeit with Mustachian living expenses) in California, so nearly half my bond/dividend gains get eaten alive by the Taxman

Thoughts:
- Put rest of stash in Vanguard CA muni-bonds and attempt to preserve cash (assuming inflation stays low or have it slightly nip at it) - which I'm leaning toward
- Get better gains by equity indexing but subject $500K to volatility with worst case deferring FIRE date 1-3 years (depending on severity of calamity)

Assumptions:
- Modest 4%-6% real gains in equity markets over next 5-10 years
- Interest rate hike to 1%-ish area between now and 2017, with 1-2 year pause thereafter before going slightly higher, perhaps to 2%-2.5%?

While I've tossed and turned over this, I'm fairly certain it come down to the quintessential "risk v. reward" question, but maybe my Mustashian pals have some better alternatives...



Indexer

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Re: Non-Equity Investment Options (With a Twist)
« Reply #1 on: March 11, 2016, 05:02:40 PM »
1. What is your goal.
2. What is your time horizon?
3. What is your risk tolerance.

Don't let anything else dictate your asset allocation. It is all noise.

Examples:
- Modest 4%-6% real gains in equity markets over next 5-10 years.   From the high in 1999 to the bottom of 2009 nominal returns were slightly negative. Stock valuations aren't as high today as they were in 1999, but they are high. High stock valuations today says nothing about what the market will do tomorrow, but it does increase the likelihood that returns over the next 5-10 years will be below historical averages.
- Interest rate hike to 1%-ish area between now and 2017, with 1-2 year pause thereafter before going slightly higher, perhaps to 2%-2.5%?  Interest rates are about as easy to predict as stock returns. 1 year from now we could easily be talking about negative interest rates like they are in Japan. Most investors and economists predicted at the end of 2013 that interest rates would rise in 2014. Bond funds took a hit in the 4th quarter of 2013 for this reason. Rates actually went 'down' in 2014 and long term bonds were one of the best performing asset classes of 2014.

If you haven't already done so research tax efficiency. If you have a combination of taxable accounts and tax deferred accounts you can keep investments that get taxed at LTCG rates, aka. stock index funds, in your taxable account. Then you can keep investments that get taxed at ordinary income tax rates, like bonds, in your IRA. The only reason you should use tax free bonds is if achieving your asset allocation requires putting bonds in your taxable account.

I would say stick to the AA you should have based on your goals and risk tolerance. Save a lot, and hope the markets are your friends but don't bank on it. If we have a crash you might have to work a little longer, but the good news is that your new contributions in those final years would be going into a depressed market... which could be a long term blessing.